The U.S. Court of Appeals for the Ninth Circuit recently held that a debt collector’s demand seeking 10 percent interest that was not expressly authorized by the debt agreement did not violate the federal Fair Debt Collection Practices Act or California’s equivalent Rosenthal Act, because the pre-judgment interest was permitted by state law.

A copy of the opinion is available at: Link to Opinion.

The plaintiff incurred a debt for dental services in 2011. The provider referred the debt to a collection agency, which sent a demand letter in May 2012 seeking the principal balance owed, plus interest at 10 percent per year.

In July 2012, the debtor filed suit in federal district court, alleging that the collection agency violated section 1692(f)(1) of the federal Fair Debt Collection Practices Act and California’s state equivalent (the “Rosenthal Act”) by seeking to collect the 10 percent interest in the demand letter.

Section 1692f(1) of the FDCPA, 15 U.S.C. 1692(f)(1), prohibits debt collectors from attempting to collect any sum not “expressly authorized by the agreement creating the debt or permitted by law.”  Courts have held that this provision is not violated if what the debt collector is trying to collect is authorized by state law.

The debtor moved for summary judgment, which the district court granted, holding that the collection agency could not collect pre-judgment interest at the statutory rate without first obtaining a judgment for breach of contract awarding pre-judgment interest.

The debtor waived her remaining claims and instead sought statutory damages, and the district court awarded her $500 in statutory damages, plus attorney’s fees and costs. The collection agency appealed.

On appeal, the Ninth Circuit first pointed out that the collection agency was clearly entitled to collect pre-judgment interest under California law when it sent the demand letter, if the debt was “certain or capable of being made certain at that time,” even though no judgment had been entered yet.

This is because section 3287(a) of the California Civil Code permits the recovery of interest from the point in time when a creditor’s right to recover “is vested,” and California courts have uniformly interpreted “vesting” as the point in time “damages become certain or capable of being made certain, not the time liability to pay those amounts is determined.”

The Court then pointed out that once the amount of damages becomes calculable mechanically based on indisputable evidence, pre-judgment interest is available as a matter right, not at the court’s discretion.

The Court reasoned that its conclusion that the collection agency was entitled to pre-judgment interest without a prior judgment is supported by section 3287(b), which applies where damages are not certain or capable of being made certain, and which provides that pre-judgment interest is only allowed where a person “is entitled under any judgment to receive damages based upon a cause of action in contract where the claim was unliquidated.”

Therefore, the Ninth Circuit held, it follows that a judgment awarding interest under section 3287(a) “merely vindicates a pre-existing right to interest instead of creating it,” and because the contract at issue was silent as to the rate of interest, the applicable rate would be the 10 percent default rate contained in section 3289 of California’s Civil Code.

The Court concluded that the district court’s summary judgment in the debtor’s favor was based on a wrong interpretation of section 3287 because the district court never determined that the debt at issue was unliquidated, i.e., not certain or capable of being made so, which would have meant that section 3287 did not apply at all.

In addition, the Ninth Circuit held that the collection agency’s argument that the claim was certain or liquidated was supported by documents from the debtor’s insurer and a settlement in small claims court between the debtor and the dental provider.

The Ninth Circuit concluded that, because the debt was certain or liquidated by May 2012 when the letter was sent, collection of pre-judgment interest was permitted by section 3287(a) of California’s Civil Code and thus did not violate section 1692f(1) of the FDCPA or the Rosenthal Act.

The district court’s judgment was reversed and the case remanded for further proceedings.